68. Model risk management

Model risk is the risk of incurring negative financial effects or reputation as a result of making incorrect business decisions on the basis of the models functioning. Within the Group, model risk is managed both on the part of a given Group entity (an owner of a model) and at the level of the Bank as a parent company of the Group.

The objective of model risk management is to mitigate the level of risk of incurring losses as a result of making incorrect business decisions on the basis of existing models in the Group through a well-defined and implemented process of models management. In the Group, the solutions functioning in the Bank are used, with the possibility of tailoring them individually to the specific nature of each Company.

All significant models in the Bank and model of the Group entities are covered by regular process of independent validation carried out by the validation PKO Bank Polski SA.

In the second half of 2015 the Bank and PKO Bank Hipoteczny SU carried the work related to the adjustment to the requirements of Recommendation W concerning the risk management models of banks issued by the Polish Financial Supervision Authority in July 2015.

68.1 Identification and assessment of model risk

Identification of model risk in the Bank mainly consists of:

  • gathering information on existing, built and planned to be build models,
  • cyclical determining the relevance of models,
  • determining potential threats that may occur during the life cycle of the model.

The model risk evaluation is aimed at determining scale of threats associated with the occurrence of the model risk and involves estimating the risk level of each model and the aggregated level of model risk. Ratings may be aggregated mainly at the level of the Bank or the Company, particular risk types or classes of models, particular processes of model life-cycle. The model risk assessment is performed at least once a year and at the moment of appearing of new models, change the scale or business profile of the Bank or the Company. Assess of the level of risk for each model shall be made not less frequently than once a year

68.2 Model risk monitoring and reporting

The purpose of model risk monitoring is to control model risk and diagnose areas for management actions. Model risk monitoring contains, in particular: the update of level of model risk, the verification of status of implementation and the valuation of effectiveness of implementation of the activities on mitigation of model risk. Monitoring results of model risk at the level of the Bank and the Group are periodically presented in the reports addressed to the RC, the Management Board and the Supervisory Board. Reports include a complex model risk assessment, in particular:

  • information on the level of model risk (in standalone and consolidated perspective)
  • model risk map,
  • information on the validation process and the status of implementation of the recommendations after validation,
  • evaluation of effectiveness of the recommendations made to reduce the model risk level,
  • potential proposed new management actions reducing the model risk.

68. 3 Managements actions concerning model risk

The purpose of management actions is to form a model risk management process and a level of this risk in the Bank and the Group.

Management actions in particular consist of:

  • issuing internal regulations,
  • determining acceptable levels of risk,
  • issuing recommendations,
  • making decisions about the use of tools supporting model risk management.